What's Really Happening in Andhra Pradesh

...the Indian microfinance story offers an irresistible parallel to a familiar Bollywood plot: in the Indian microfinance potboiler, the SHG model is the elder brother in an Indian joint family while the MFIs play the part of an aggressive younger brother. The elder brother struggles to uphold tradition and retain his leadership position, while the maverick younger brother tries to break free (using new financial and technology tools), often overenthusiastically, and sometimes recklessly, in pursuit of the same goals.This script bears many similarities to a classic Bollywood family drama. Unfortunately, the conflict between the two brothers often leaves the family destitute. As the AP microfinance drama plays out in the national media and the world watches, it is mainly the poor, forced into choices not of their making, who will suffer.

That's from a great new paper from Intellecap, which is based in Hyderabad, the capital of Andhra Pradesh. You have to read it if you're interested in this subject. This is what I love about India: you rarely see such high-quality analysis coming out of Bangladeshi institutions. India is bursting with it. Understand: the title of this post is a joke specifically inspired by the above quote. Here are more quotes:

The Krishna Crisis demonstrated the potential for conflict between a well-intentioned but self-righteous state government, and ambitious commercial entities, as co-stars in the development sphere. The State believed that it was serving its poor by providing them low-cost loans in an organized manner. Yet they saw that the more organized commercial microfinance lenders, despite charging higher interest rates, were able to attract clients and achieve a better repayment rate.

Through its allegations, in the extraordinarily-phrased Preamble, the Ordinance strongly suggests government dissatisfaction with, and even broad antipathy towards, the entire MFI industry. However, these premises may not tell the whole story. With the fullest respect, it is possible to read into these allegations signs of a state government unhappy that its programs (and perhaps the individual influences of some members of government) are being undercut by the MFIs.

While it would not be unreasonable to expect the State to exercise greater restraint than was the case in AP recently, it appears that MFIs did not give adequate focus to securing buy-in from this important stakeholder. They have not adequately educated government about their role, nor have they worked with government to allay their fears.While we believe that the AP Ordinance demonstrates certain mistaken perceptions on the part of the state government, we also believe there have been some failures by the microfinance industry, in terms of how MFIs conduct themselves and how they manage relationships with internal and external stakeholders.

AP has the highest penetration of microfinance in the country. Per available data, as of March 2010 the total microfinance portfolio outstanding in the state is close to INR 9,000 Crores [90 billion rupees, about $2 billion] and the total number of borrowers in AP is above 6 million. This has led to suggestions that the state is over-penetrated by MFIs, giving rise to the phenomenon of multiple loans. Given that the state population is nearly 8.27 Crore [82.7 million] and microcredit demand is nearly INR 30,000 Crores [300 billion rupees, about $6.7 billion], we consider that the validity of this suggestion is questionable. However, it has almost certainly contributed to the sense of conflict between government and MFIs.

…it is entirely possible that some MFIs (or their agents) have resorted to coercive practices which cross the line of legality (just as some mainstream banks did, some years ago). Some reports have also indicated the presence of other organizations, not registered with either of the industry bodies but describing themselves as MFIs, which issue loans, charge very high rates of interest, and collect repayments aggressively and sometimes violently.

In our view, the current crisis has its roots in the centrality of AP to the microfinance industry, the growth of MFIs in the state, and the adversarial consequences of their success in recruiting clients impacting on a sensitive demographic for government. The state government, which undoubtedly deserves credit for earlier schemes which in a sense prepared the ground for MFIs, reacted with a measure of absolutism that does not augur well for any of the parties involved.In our view, the most disturbing element of this crisis is that government appears to be ready to throw away all the gains to the Indian social fabric that have been brought about by MFIs – which serve exactly those sections of society that have been hitherto excluded from the giant strides the Indian economy is taking. This would be a classic case of throwing out the baby with the bathwater, and we add our voice to those asking government and the media to recognize the adverse, unintended consequences of such actions.The media’s role has not been above criticism, and parts of the media appear to have aligned themselves with reporting agendas that can only be described as irresponsible. As in any other sunrise sector, microfinance